FED at the Plate

On Thursday, the European Central Bank Governing Council removed the explicit language that policy rates could go lower from their current levels, but Draghi said that normalization of monetary policy was not even discussed. The former was viewed as hawkish, while the latter was interpreted as fairly dovish. The Euro sold off and European/US rates widened. European equities weakened, choosing to focus on the hawkish implications for now.

Back across the Atlantic, U.S. Treasury yields moved higher this week after bottoming on June 6. The move was not even across the curve, however, with the 2-year rate rising more than the 10-year rate, further lowering the 10-year minus 2-year differential. In the context of the FED raising rates, it should be noted that since the end of 2016, the 10-year rate has dropped 26 basis points, while the yield on the 2-year note has risen nine basis points. The FED can control short-term rates, but not long-term rates. Hence, a flattening yield curve, driven by the front end moving up and the back end moving down, implies that there is concern the Federal Reserve is going to make a policy mistake; there is fear that the FED is going to move too much too soon before the economic recovery has time to strengthen.

This coming week, the FOMC will release its latest rate decision (virtually guaranteed to be a hike) on Wednesday and the Bank of England and the Swiss National Bank will announce their latest moves on Thursday. The Bank of Japan meets on Friday and investors will receive a raft of U.S. economic data throughout the week , from retail sales and CPI to housing starts and Empire Manufacturing.

Equities

The AAII bull sentiment counter-trend pattern continues to develop (chart below). The bull sentiment rose 9% to 35.4%, but this is still below average and not a signal that we are topping out.

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The put-to-call ratios turned up slightly during Friday afternoon’s pull-back, but it is unclear whether this is the start of a ‘dip’ or just a ‘blip’; is this the start of the ‘buy-the-dip’ we are expecting, of is it just a tiny adjustment on the road to higher prices? (chart below)

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We continue to watch the similarity between 1999–2000 and today (charts below).

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Gold

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Long-term, gold continues to display bearish head-and-shoulders patterns which means that the probability of gold dropping in price is better than 50/50 (chart below).

The dollar and rates have started to turn this week and if they follow-through, gold will continue to weaken (charts below).

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The commitment of futures traders (as of Tuesday) shows speculators increased their long positions, while the commercial traders increased their short holdings. This supports the probability of weaker gold prices (chart below).